Verari Founder Outlines Strategy After High-Speed Wipeout and Rebirth

Bruce V. Bigelow

The demise of San Diego’s Verari Systems and its resurrection as Verari Technologies happened so fast you might not have realized what happened unless you were paying close attention over the holidays.

The longtime local company, which specializes in making high-performance servers, server racks, and energy-efficient data storage centers, laid off 223 employees and ceased operations just two weeks before Christmas. It was hard to make out what was happening at the time, chiefly because Verari denied media reports that it had shut down—saying instead that its doors were open and it was merely “restructuring” its business.

But a few weeks later, a notice on Verari’s website said the high-performance computer company was in fact soliciting buyers in a public auction. All Verari assets were later sold through a liquidation known as an “assignment for the benefit of creditors.” Such liquidations, sometimes known as “friendly foreclosures,” are not that unusual—especially these days, according to Bruce Bennett, a Los Angeles bankruptcy lawyer. Bennett told me that in these scenarios, a senior secured creditor, usually a bank that provided a business loan, forces the issue, but ultimately with the company’s cooperation. “It’s just an inherently simpler and less expensive way of liquidating the assets instead of going through bankruptcy,” Bennett says. In most cases, no new company emerges from such liquidations.

But Bennett says it’s not that unusual for a key figure from a distressed company to step back in and acquire all the assets—which is what happened at Verari. Dave Driggers, who founded the San Diego company in 1991 and was working as Verari’s chief technology officer, led an investment group that bought all of the old Verari’s assets. Driggers also stepped in as CEO to reboot the San Diego computer company, which is now known as Verari Technologies. Less than 40 percent of the old Verari’s 223 employees are expected to get their jobs back.

Dave Driggers

Verari reopened for business last week, capping a lightning-fast salvage that took less than six weeks to carry out. But it tortures common sense to describe what happened as a restructuring.

In a recent interview, Driggers told me that all of Verari’s previous investors were wiped out—after raising $59 million in three rounds—and that they were not part of the group that bought Verari’s assets. “You never heard me announce a restructuring,” Driggers said. “I chose not to say anything during the process—from the day we shut down until after the acquisition.”

During our conversation, Driggers explained why he’s optimistic about the future of Verari Technologies—which he says is moving forward with the same technology and a better business model. He also explained why the old Verari failed.

With a mixture of exasperation and pride, Driggers said that Verari “had incurred a huge amount of debt” while its technology and products were winning multiple industry awards—and the company itself was winning business with major customers. Its accounts include Akamai, Microsoft, Qualcomm, Petrobras, Harris, Lockheed Martin, NASA, and others. But “having to service that debt got incredibly expensive as the credit markets got sort of tied up,” Driggers said. “The business model was too expensive, the debt service was crushing the company’s [profit] margins, and manufacturing was becoming very daunting.”

“We had a choice of either taking on additional investors or more debt,” Driggers added. But Verari’s VCs weren’t interested and neither was its chief lender, Silicon Valley Bank.

Driggers founded the company in 1991 as Computer Parts Plus, a storefront retailer which developed a strong business selling components to local companies like Cubic (NYSE: CUB), the San Diego defense contractor, and helping them understand their computer needs. “We evolved over time, as the company went from a retail store to a hardcore B2B that put servers into racks to help customers save space,” Driggers said.

He confirmed that Verari had raised more than $59 million in three rounds of venture funding from the Carlyle Group, Celerity Partners, Sierra Ventures, and Voyager Capital. He said CitiGroup also was a strategic investor.

As a relatively small company, Verari competed with varying success against much bigger server makers, including Hewlett-Packard, IBM, and Dell. The company’s name also changed several times. Computer Parts Plus became CPP, and later RackSaver. Driggers said the business became Verari Systems in 2004, when it acquired a software business and took in more venture capital. Driggers, who had been CEO, became the CTO in 2006 when Verari’s venture investors decided to bring in a new chairman and CEO, former EMC executive vice president David B. Wright.

In the days following Verari’s shutdown, laid-off employees complained bitterly about Wright’s “big company” ambitions and management style—and it is clear that Driggers has resized the new Verari’s strategy to focus below the Tier 1 server markets dominated by HP, IBM and Dell.

“The strategy going forward is to partner, partner, partner,” Driggers told me. “The way the company started was as a computer consulting business that got close to the clients it served.”

Driggers says he wants to return to that business model by partnering with contract manufacturers, licensing value-added resellers to expand sales channels, and integrating its technologies and products with third-party suppliers. He intends to rehire from 60 to 90 employees—or about 27 to 39 percent of the previous workforce. “We will keep our direct sales force, but it will be a smaller sales force that’s more focused on our core business of working as consultants in developing solutions for customers and who provide lots of support during the install process.”

As for the capital shortage that ultimately undermined the old Verari, Driggers would not identify the other investors who helped him buy Verari out of foreclosure, or say how much money was injected into the new company.

But Driggers said the new owners got almost everything in the liquidation, including factory and corporate assets, and 90-plus percent of existing inventories, “so there’s not a heavy up-front cost for us” to get restarted. He also said, “There was a significant business backlog, so there’s not a lot of costs to cover.” He estimates the new company will be profitable by March. “And obviously,” Driggers added, “we don’t have to service that debt any more—and trust me, that was one of the single biggest costs that we had previously.”